Friday, July 30, 2010

Andreas Halvorsen's hedge fund firm Viking Global is out with its second quarter 2010 investor letter and courtesy of Dealbreaker we wanted to highlight some of their latest portfolio maneuvers. Here are Viking's latest top 10 positions:

Right off the bat there are several changes to highlight between Q1 and Q2. Back in the first quarter, Visa (V) was Viking's largest position. This time around, Visa is nowhere to be found in their top 10 positions. One might assume they reduced or exited this position, but there was no commentary on this stake to verify. If you read into their letter, you'll see that they are more focused on building concentrated positions and as a result ramped up stakes in various companies. Visa, apparently, was not one of them.

It's quite possible that the credit card processor is still a holding at Viking and other portfolio positions merely leapfrogged their V stake. The same could be said for their position in Express Scripts (ESRX) as it was their fourth largest holding in the first quarter and is nowhere to be found on their top 10 holdings for Q2. These positions will certainly be something to look for in their Q2 13F filing that we'll cover when it's released in a few weeks.

For the second quarter, Halvorsen's hedge fund maintains its long-held position in Invesco as it moves back up to their top holding. Halvorsen writes,

"Our largest loss in the quarter was Invesco which cost us 1.3% in VGE and 1.4% in VLF. Invesco has been in our top ten list since we initiated the position in the fourth quarter of 2007 and was our second most profitable investment in 2009. During the second quarter, Invesco sold off along with other asset managers despite reporting better than consensus first quarter earnings and higher synergy estimates from the Van Kampen acquisition. Encouraged by the fundamental strength of the company and financial and strategic benefits from the Van Kampen acquisition, our core thesis has not changed and we continue to believe that Invesco will outperform its competitors. Viking is currently net long 2.4% in the Asset Management and Custody Banks sub-industry group, which includes the Invesco long position and short positions in asset managers that we believe will experience deteriorating fundamentals and are more levered towards a declining market."

In terms of other Viking positions, Unilever also remains a high conviction pick for them. Moving down the top 10 positions list, News Corp and Tyco also retain their status as a top holding from Q1 to Q2. In terms of new additions, Viking has moved up the following positions: Adobe, American Tower, Comcast, Goodrich, Oracle, and Sherwin-Williams.

Of those stakes, Viking has increased conviction in their new American Tower (AMT) position. Viking likes the company due to its solid business model with high barriers of entry, pricing power, and strong secular growth. Additionally, the company has compelling operations overseas in numerous growth markets. Of this stake, Halvorsen writes,

"We have owned American Tower in the past and we re-initiated a position this quarter because we believe the market has taken many of these characteristics for granted and is underestimating future growth opportunities both domestically and internationally. Additionally, we believe that American Tower’s shareholder remuneration will accelerate over the next several quarters and that, in light of certain tax incentives, the company may convert to a REIT. We find American Tower to have a superior business model relative to most traditional REITs, yet it trades at a discount to the REIT-average. We believe the combination of predictable growth, accelerating shareholder returns, and pending REIT status will generate greater shareholder interest over the next several quarters causing the stock to trade closer to our price target over time. As of June 30, American Tower was our third largest long position at 4.3% of VGE capital and 4.9% of VLF capital."

In addition to these portfolio changes, it's obviously worth noting that Viking has struggled performance-wise this year as their Viking Global Equities portfolio was down 5% in the second quarter. As such, Halvorsen penned quite an explanation as to how Viking will strive to atone for these errors and the solution apparently circles around the idea of increased concentration in their highest conviction picks. As such, Viking has added to numerous positions, many of which we've detailed recently. It will be interesting to see if Viking's increased concentration (and possibly increased volatility) is a recipe for correcting their recent struggles.

Hedge fund T2 Partners just filed a 13D with the SEC regarding Alloy, Inc. (ALOY). The filing discloses portfolio activity on July 21st, 2010 and reveals that Whitney Tilson and Glenn Tongue's firm have taken a 5.2% ownership stake in ALOY with 669,946 shares. This is a brand new position for the hedge fund and you can hear their other latest investment ideas at the upcoming Value Investing Congress (special discount here).

The aggregate purchase cost was $6,271,325 and they actually started buying shares as early as June 18th. While they started purchasing around $7.91 per share, the bulk of their purchases were done in the $9.50 per share range. Interestingly enough, ALOY accepted an offer from a private equity firm valued at $9.80 per share on June 24th. As such, Tilson's stake could merely be a risk arbitrage play. However, it is interesting that he started buying before the takeover. Maybe he has something else in mind because after all he did file a 13D, which signifies an activist stake. Not to mention, T2 is not normally known for going activist.

Taken from Google Finance, Alloy is "a provider of media and marketing programs offering advertisers the ability to reach youth and non-youth targeted consumer segments through a range of assets and marketing programs, including digital, display board, direct mail, content production and educational programming".

You can hear Whitney Tilson and Glenn Tongue's latest investment ideas live and in person along with a ton of prominent hedge fund managers at the Value Investing Congress. The event takes place in October in New York and readers can receive a special discount to the event here.

Wednesday, July 28, 2010

Today we present you with the May 2010 investor letter from David Gerstenhaber's global macro hedge fund Argonaut Capital. Although the letter is a couple of months old, we thought it worthwhile for our readers to be able to gauge their macro perspective. After all, this letter comes after the month of May where the majority of hedge funds suffered losses and many began to question the economic recovery.

Below you'll find Argonaut Capital's assessment as to "What Went Wrong in the Markets in May." Since that month was so turbulent, we thought it poignant to highlight these factors should investors start to become anxious again in the near future. So, what went wrong?

1. Evidence of the peak in economic growth2. The impact of Europe's debt crisis3. A policy-engineered slowdown in China

Given the turmoil of May and the fact that many hedge funds suffered losses (Argonaut included), you should note that Gerstenhaber's fund has materially changed their outlook and adjusted portfolio themes accordingly. In currencies, the hedge fund had been in predominantly long Asian currency positions as they thought the Chinese renminbi would appreciate. At the same time, they were short the Japanese yen. Due to their shift in stance, they have reduced the 'renminbi appreciation' theme on their books.

Also worth pointing out is the fact that they've reduced their longstanding U.S. yield curve steepener position. You'll recall that Julian Robertson (Gerstenhaber's former boss at Tiger Management) had held various curve steepener positions as well. Given the uncertainty surrounding the long-term viability of the euro, Argonaut feels that what is bearish for the euro should be positive for U.S. Treasuries. And speaking of the euro, the hedge fund has high conviction in their short of the currency. Additionally, they are assured in their long in gold. This of course coincides with many other hedge funds that are long gold including John Paulson (who has a separate gold fund) as well as David Einhorn (who holds physical gold).

In equities, Gerstenhaber's hedge fund has exuded concern as they feel earnings estimates are too high in many sectors. In particular, they feel that the consumer discretionary space will disappoint. Additionally, they feel expectations in the technology space might be a tad too aggressive. In the earnings cycle overall, Argonaut believes that top-line revenue estimates will be very hard to beat (or meet, for that matter).

Argonaut writes that, "one overwhelming conclusion from our read of the economic data is that the 'take-off' phase of the global recovery is now behind us, with economic growth at best leveling out, but more likely decelerating going forward." For more on this subject, we've previously detailed David Gerstenhaber's thoughts on the economy.

Lastly, the hedge fund has used the dreaded 'd' word. No, not depression... but close. Deflation. They feel the risk still runs high in the US and Argonaut has long been of the view that deflation, not inflation, is the bigger threat.

Overall, Argonaut Capital has painted a much less rosy picture than other managers we've covered. While this could be attributed to the droves of data they see due to their global macro bent, it also could partially be a function of the fast and furious way markets collapsed in that particular month. One thing's for certain: May certainly altered their views as they believe that there will be a continued rise in volatility and sales of risk assets.

Embedded below is the May 2010 commentary from David Gerstenhaber's global macro hedge fund Argonaut Capital:

Tuesday, July 27, 2010

Today we present the latest investor letter from Jay Petschek and Steven Major's hedge fund Corsair Capital. For the second quarter, Corsair was down -6.3% and that leaves them flat on the year. So, why should you care what they have to say? Well, because they've returned an impressive 14.9% annualized since inception in 1991.

Petschek and Major believe that a lot of pessimism is currently priced into stocks. While there has been much talk this year about the lack of success in stockpicking, Corsair argues that, "while tight correlation among stocks is challenging in the near term, it is helpful in creating opportunities for stockpicking." In general, they are looking for companies that can generate value beyond merely participating in an economic recovery. In particular, they are trying to focus on less cyclical business models.

So, what stocks do they see as compelling? Take LyondellBasell (LALLF) as an example. This post-bankruptcy equity has improved its balance sheet and operating cost structure yet has sold off recently. While comparable companies trade at 6x mid-cycle EBITDA, LALLF only trades at 4.5x. Additionally, the company trades below a bid it received while in bankruptcy from Reliance Industries. This isn't the first time we've seen a hedge fund advocate a position in this chemicals company. At the Ira Sohn Investment Conference, Jamie Dinan of hedge fund York Capital presented the bullish case for Lyondell. Additionally, Dan Loeb's hedge fund Third Point LLC stated they were bullish on post-bankruptcy equities as well in a recent investor letter.

In Corsair's first quarter commentary, Petscheck and Major outlined a bullish stance on Expedia (EXPE). This stance continues in their most recent letter given the company is trading at 12x EPS and under 10x free cash flow. However, they have noted some caution due to Google's move into the online travel industry with its acquisition of ITA. While they are watching the developments there, they like the risk/reward skew. The online travel booking space has certainly garnered interest from some prominent hedge funds. Chase Coleman's Tiger Global has fancied Priceline.com (PCLN). Additionally, Matt Iorio's hedge fund White Elm Capital has in the past added shares of Orbitz (OWW). Corsair, on the other hand, prefers Expedia (mainly due to their high growth and high margin asset, TripAdvisor).

In addition to those plays, hedge fund Corsair also highlights Live Nation Entertainment (LYV) as an attractive investment due to secular tailwinds, an oligopolistic business and modest capital requirements. Keep in mind that fellow hedge fund Lone Pine Capital acquired a Live Nation stake as well. Lastly, Corsair points out opportunity in the leveraged recapitalization of Fidelity National Information (FIS), one of the more widely held stocks among hedge funds.

Embedded below is Corsair Capital's second quarter letter as well as a full investment write-up on their latest pick, insurance broker AON (AON):

While we typically cover investments hedge funds make in public companies, we like to keep an eye on investments made in private companies as well. The reason? A potential lead to secular themes that investment firms are targeting. Case in point: hedge fund Tiger Global and its portfolio of web properties.

According to Russian newspaper Vedomosti, Chase Coleman's hedge fund has paid $10 million for a 40% stake in Anywayanyday.com, an online ticket booking site in Russia. The site is owned by an affiliate of Valars, a grain trading company also based in Russia. The website currently garners around 3% of the Russian online airline ticket sales market and sees yearly revenue of around $5 million. The company is also planning to 'revitalize' its presence in the hotel booking segment as well.

Those of you familiar with Chase Coleman's hedge fund firm will already know that they have a small portion of the portfolio allocated to private investments. And more often than not, that allocation is targeted at the technology sector. Tiger Global of course was founded by Chase Coleman after being seeded by legendary hedge fund manager Julian Robertson.

Glancing at some of Tiger Global's other private stakes, you start to see a theme of emerging market online portals. Tiger also owns a stake in Yandex, a Russian search/portal company, a position in Yonja (a Turkish social media site), Indian focused online travel site makemytrip.com (which recently filed to go public), as well as a stake in Maktoob (an Arabic portal site that was acquired by Yahoo). Examining Tiger's public equity stakes, you see the online portal theme continues. As of the first quarter, they also owned sizable stakes in Google (GOOG), Mercadolibre (MELI), and Priceline.com (PCLN). They definitely have a decent amount of exposure to the portal/travel meme in both public and private stakes.

Stephen Mandel's hedge fund Lone Pine Capital just filed a 13G with the SEC regarding Lincare Holdings (LNCR). Due to portfolio activity on July 16th, 2010 Lone Pine has disclosed a 6.4% ownership stake in LNCR with 6,244,817 shares. This is a brand new position for Mandel because he previously did not own any shares when we looked at Lone Pine's portfolio. In terms of other activity, we highlighted late last month that Lone Pine had boosted its position in Estee Lauder (EL).

Named after a historical tree at his alma mater (Dartmouth College), Mandel founded Lone Pine Capital after serving at Julian Robertson's Tiger Management. Typically, Mandel seeks to identify companies with good management teams that are trading below intrinsic value. While they've had a successful past, Lone Pine is struggling a bit this year thus far performance wise. According to Institutional Investor, "Lone Cypress, his long-short fund, was off about 3.6 percent while Lone Cascade, his long-only fund, was down about 4.6%." This is in contrast to 2009, where their Lone Cypress fund was up 17.7% as detailed in our hedge fund performance numbers post.

Taken from Google Finance, Lincare Holdings is "a provider of oxygen and other respiratory therapy services to patients in the home. Its customers suffer from chronic obstructive pulmonary disease (COPD), such as emphysema, chronic bronchitis or asthma, and require supplemental oxygen or other respiratory therapy services. Lincare also provides a variety of durable medical equipment (DME) and home infusion therapies in certain geographic markets."

Monday, July 26, 2010

Earlier today we highlighted market strategist Jeff Saut's thinking that it may be time to rebalance portfolios. Within his commentary, he laid out a theoretical asset allocation as to how he would structure a "businessman's risk" portfolio. When Saut first entered the industry 40 years ago, his mentor told him to allocate 20% of money to Treasuries, 20% to stocks, 20% to bonds, 20% into precious metals, and 20% into real estate. Saut did not heed this advice though admits that over the long haul it has performed decently. Instead, Saut has constructed the aptly named "businessman's risk" portfolio which is more to his liking. Here's the breakdown:

50% Equities: For this portion of the portfolio, Saut favors emerging and frontier markets to developed markets. He targets international exposure using the MFS International Diversification Fund (MDIDX). For your US exposure, he feels large/mid caps are preferred over small caps and to favor growth over value.

15% Fixed Income: In this asset class, he prefers U.S. over non-U.S. exposure and corporates over treasuries. He recommends funds like Putnam's Diversified Income Fund (PDINX) for this allocation.

15% Cash: While this part of the portfolio is very low yield, it is a "safe place to wait for risk aversion to abate."

10% Alternative Investments: He utilizes this asset class purely for diversification purposes. This category encompasses numerous options ranging from real estate to private equity to managed futures. There are a myriad of ways to gain exposure and some ideas can be found in our hedge fund portfolio tracking series.

So there you have the "businessman's risk" portfolio. Keep in mind that this allocation doesn't seem to take into consideration age, retirement horizon, or other factors. Instead, it serves as a generic template for those willing to take on some risk. Determining and managing your risk tolerance is a very important aspect of portfolio management and you can view Jeff Saut's risk management principles for more on the subject. The portfolio above is certainly more risk tolerant, hence its name: the "businessman's risk" portfolio. Below is a graphic breakdown of Saut's favored asset allocation:

Market strategist Jeff Saut believes that asset allocation is the key to alpha generation. But to be more specific, he is not dogmatic about the approach and instead prefers dynamic asset allocation. This is an extension of normal asset allocation in that it incorporates the use of various indicators to complement the normal analysis, intuition, and common sense that applies to creating portfolios. He uses this diversification as a tool to mitigate risk. Those of you increasingly concerned about the presence of risk in your portfolios can heed Jeff Saut's risk management principles.

The reason he brings this whole notion up in his weekly investment strategy is because he feels we are approaching a point in the markets where rebalancing portfolios might be in order. His proprietary intermediate-term indicator, stochastic indicators, and the 12-month moving average are all warranting caution. However, the Raymond James Chief Investment Strategist has been bullish on equities in the near-term in part due to their massively oversold condition. He recently proclaimed that risk adjusted stock selection is the key to portfolio success.

In particular, Saut has been fond of technology stocks as their weekly forward earnings per share are at a record high. He has mentioned Microsoft (MSFT) numerous times as an attractive play. This morning we posted up a bullish presentation on MSFT from hedge fund T2 Partners as well. Saut's other technology stock favorites include Iridium (IRDM), NII Holdings (NIHD), Nuance (NUAN) and PAREXEL (PRXL).

In the end, Saut feels the signal to rebalance is coming soon. Ultimately, the type of portfolio to rebalance stands to be determined. The type of portfolio to rebalance to is largely reliant upon whether or not the market can re-capture its 200-day moving average. The market is currently trading right around that level, testing resistance to the upside. Saut feels that many technical indicators will soon resolve themselves and will determine just how defensive (or not) a portfolio should be. In a separate post, we'll outline Saut's "Businessman's risk" portfolio and how it is allocated. In the mean time, embedded below is Saut's full market commentary for this week examining the potential upcoming rebalance period:

If there's one overwhelming theme we've seen from hedge funds as of late, it would be the 'long high quality large caps' trade. Whitney Tilson and Glenn Tongue's hedge fund T2 Partners further verify this with their latest bullish presentation on Anheuser-Busch Inbev (BUD), Microsoft (MSFT), and BP (BP). These are some of the largest companies in the world and T2 sees value in their shares. While value is the underlying theme, they are bullish on each respective company for very different reasons.

T2 Partners recently outlined their rationale with this presentation at the annual Value Investing Seminar in Italy. Keep in mind that T2 and many prominent hedge funds will be presenting their latest picks in October at the Value Investing Congress (special discount here). Now, Tilson and Tongue start their most recent presentation with Anheuser-Busch InBev (BUD). They cite that the company is a very high quality business with pricing power and a best of breed management team. A result of the merger between InBev and Anheuser-Busch, the company has density in major markets with high margins and high returns. Additionally, T2 points out valuation, writing, "Pro forma for deleveraging and synergies, (it) trades for 9.3x 2012 free cash flow." The company has beat its 30% EBITDA margin goal handily and has cut costs.

On Anheuser-Busch InBev, T2 Partners says, "you can currently buy BUD with an entry FCF yield of 10% for a business that can probably grow at GDP + inflation for a long time, giving you a long term IRR of at least 15% without any multiple expansion." We've previously covered a separate and specific T2 Partners presentation on BUD worth checking out as well.

Lastly, Whitney Tilson and Glenn Tongue shift their views to the oil spill and a potential opportunity with BP (BP). Assuming a worst case scenario where BP owes $70 billion in liability, T2 Partners feels the company can easily earn its way out of these liabilities as its current operating income is estimated to be $34 billion in 2010 (BP has the fourth highest revenues and profits of the Fortune 500). Given the past precedents of oil spills, T2 also cites previous incidents including the Ixtoc blowout in 1979, the Gulf War oil spill in 1991, and the Exxon Valdez spill in 1989 where the negative impact for oil companies involved was less than feared. Overall, T2 feels that BP's balance sheet, cash flow generation, and recent asset sales to Apache (among other strategies) will allow them to weather this storm. You can find hedge fund T2 Partners' in-depth analysis of BP here.

And embedded below is the hedge fund's full presentation on these three large cap companies:

Continuing the weekly compilation of quotes here at Market Folly, we give you a classic from the movie Wall Street. While everyone always quotes Gordon Gekko's notable line, "Greed is good", we wanted to highlight an equally compelling tidbit. Given the fact that the movie's sequel, Wall Street 2, is coming out in a few months, we found this quotation to be quite timely:

"The most valuable commodity I know if is information. Wouldn't you agree?"

~ Gordon Gekko

And for those of you wanting to hear it directly from the man himself, here's an embedded audio clip you can press play to hear:

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